Replies to post #1029 on The Rising Influence of Rising Affluence

[DewDiligence]

PBR Boosts Cap-Ex Budget

http://online.wsj.com/article/SB10001424052748704895204575320942806401092.html

›JUNE 22, 2010
By JEFF FICK

RIO DE JANEIRO—Brazilian state-run energy giant Petroleo Brasileiro SA will maintain its aggressive expansion plans with investments of $224 billion over the next five years.

The federal oil company's latest 2010-14 investment budget, disclosed Monday, topped the previous estimate of between $200 billion and $220 billion. The budget compares to investments of $174.4 billion in the previous five-year plan, covering 2009 to 2013.

The ambitious budget makes Petrobras one of the few major oil companies willing to invest heavily amid lower oil prices and global economic uncertainty. It also indicates the company is shrugging off technical concerns raised in the wake of BP PLC's deepwater disaster in the U.S. Gulf of Mexico.

Petrobras said it expects two fields in the U.S. Gulf of Mexico to start production in the second half of this year. Drilling was affected by the moratorium on deepwater drilling after the Deepwater Horizon well disaster.

Output at the two fields are expected to reach 80,000 barrels a day this year. In the second phase of development, it will need to drill 14 additional wells to ramp up output, the company said.

The staggering capital expenditures will be used primarily to develop Brazil's massive offshore oil reserves in the presalt region, which is expected to be pricey and complicated due to the depth of the reserves.

The company will invest $118.8 billion in exploration and production in the 2010-2014 period, with $30.9 billion earmarked for presalt development. Its refining, transportation and commercial sales businesses will get investments of $73.6 billion.

Meanwhile, Petrobras's gas and energy business will receive investments of $17.8 billion, and $5.1 billion will be earmarked for the company's petrochemicals unit. Biofuels, a recent focus of the company, will see investments of $3.5 billion, the company said.

Petrobras said it plans to focus international investments on exploration in the Atlantic Ocean basin, especially in the U.S. Gulf of Mexico and West Africa, Chief Executive Jose Sergio Gabrielli said Monday during discussions of the company's investment plan.

Petrobras has no plans to expand international refining, Mr. Gabrielli added, ruling out rumors that Petrobras was a possible buyer for Valero Energy Corp.'s troubled refinery in Aruba. In 2008, Petrobras had negotiated to buy the 255,000-barrel-a-day refinery.

Petrobras plans to boost daily crude-oil and natural-gas production to 3.91 million barrels of oil equivalent by 2014, including 152,000 barrels a day from the recently discovered presalt reserves. [3.91M boe/day would put PBR in the same league with XOM and BP.] The totals are pegged to rise to 5.38 million BOE a day by 2020, with presalt oil output of 1.18 million barrels a day.

The oil company, however, said it reduced its total production target by 318,000 barrels a day from the 2009-2013 strategic plan as part of its review of future exploration and production investments. The production targets also don't include any output from areas included in the proposed oil rights swap with the government, the company said.

The presalt finds were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt.

Petrobras will face a financing challenge to pay for its aggressive development goals. The company said that it will need to raise $58 billion in capital to fund the 2010-2014 investment plan. Petrobras also said that it expects operational cash flow of $155.2 billion in the period.

While the company is currently close to the 35% net debt-to-capitalization limit needed to keep its investment-grade credit rating, Petrobras said that it would maintain a between 25% and 35% leverage target for 2010-2014.

The company is working hard to reduce its leverage. Now that the cost of the 2010-2014 investment plan is known, the company can take another step in a planned share offer, part of the Brazilian government's complicated capitalization plan for Petrobras.

Under the plan, the government will grant Petrobras the right to explore and produce up to 5 billion barrels of crude from government-held presalt areas.

Petrobras will pay for the oil rights in new shares, with minority shareholders also having the option to accompany the offer.

Analysts have estimated that the share offer could be valued between $50 billion and $60 billion, which would make it one of the world's largest-ever share sales.‹

[DewDiligence]

PBR Delays Government Recapitalization Plan

http://dealbook.blogs.nytimes.com/2010/06/23/petrobras-delays-rights-issue-until-sept/

›by Chris V. Nicholson
June 23, 2010, 5:11 am

Petrobras, the Brazilian national oil company, said Tuesday that it would defer a rights issue worth up to 150 billion reais ($84 billion) until September pending a government decision to evaluate certain oil assets.

The Petrobras offering, on track to be the largest worldwide this year, was set for the end of the month and is intended to capitalize the company to finance its exploration of so-called presalt fields in deep waters off the coast of Brazil, where some oil reservoirs are buried below a salt stratum.

The postponed issue, approved by shareholders the same day, will offer up to 60 billion reais worth of preferred shares, and up to 90 billion reais in common stock — much larger than previously reported. [For Brazilian stocks, the “common” shares are voting and the “preferred” shares are non-voting.]

Petrobras shares slid 1 real, or 2.42 percent, to close at 33.24 reais in São Paolo on Tuesday, according to Bovespa data, as the market shrunk from uncertainties about the upcoming issue. Petrobras has said that it needs to raise $58 billion in the coming years to finance its 2010-14 business plan, which calls for investments of $224 billion [#msg-51550385].

The Petrobras rights issue is tied to its purchase of oil rights in the presalt area, with the Brazilian Parliament last month approving both moves in a bill that also authorized the government to subscribe to the rights issue.

The government, which partly privatized Petrobras in 1997, still owns more than 55 percent of its ordinary [i.e. voting] shares.

Specifically, the bill passed said Petrobras could explore and produce “five billion barrels of oil equivalent,” but the value of those rights had yet to be determined, and now seem to be the cause of the giant fundraising’s delay.

In its statement Tuesday, Petrobras said the official valuation of the assets by the National Petroleum Agency (or ANP by its Portuguese initials) would not be ready until August, and cited the timeline as its reason for delaying the rights issue. [I’m not convinced this is the real reason.]

A Petrobras contractor was expected to submit its own estimate of the oil rights and then square its number with that of ANP later this year, leaving it unclear as to why the ANP’s announcement alone should have such enormous consequences.

Bloomberg News noted that initial public offerings in emerging markets raised $29.3 billion this quarter, three times as much as those in the developed world, and questioned whether the market would be able to absorb both Petrobras’s ambitious issue and Agricultural Bank of China’s offering this month, expected to net well over $20 billion.‹

[DewDiligence]

I’m not a fan of PBR for the reasons cited in #msg-51214642. This Barron’s
article presents the opposing view, which I would characterize as naïve.

http://online.barrons.com/article/SB50001424052970203296004575338572714305994.html

›Drilling for Value in Petrobras Shares

JULY 3, 2010
By DIMITRA DEFOTIS

The Brazilian oil giant Petroleo Brasileiro, or Petrobras, has made some of the biggest oil discoveries in the world in recent decades, sandwiched in salt beds deep below the country's coastal waters. Eventually the company's latest finds could double existing reserves of more than 12 billion barrels, while production could pump up earnings well beyond this year's expected $3.85 per American depositary receipt (ticker: PBR).

Yet investors have been fleeing the company's shares, spooked by the Brazilian government's plan to grant Petrobras production rights for up to five billion new barrels in return for more stock and greater control. The complex maneuver also will feature a stock offering in the fall that will enable private shareholders to increase their stake, with the size and price to be determined after independent auditors value the barrels involved in the swap. [How independent will these auditors really be?] The government, which formed the company in 1953, owns only a third of the shares. But it retains 55% voting control in Petrobras [there are two classes of shareholders (voting and non-voting), and the government owns a majority of the voting shares], which has a market value of $143 billion.

While there is ample cause for concern about greater state control, as well as the $224 billion cost of the company's proposed four-year development plan, the selloff affords an attractive opportunity for long-term investors. Petrobras' ADRs have fallen 35% in the past seven months, to around 34, or 7.4 times next year's expected earnings, erasing the valuation premium they once enjoyed relative to most other large integrated oil companies. The ADRs now trade below Exxon Mobil's (XOM) price/earnings ratio, though above the valuations of other majors. Bullish analysts expect the stock, which once traded as high as 17 times earnings, to rebound to 50 or so in the next 12 months, as the uncertainty surrounding the government's transfer eases and the earnings outlook improves.

Petrobras projects oil production will increase by 9.4% annually to 3.9 billion barrels a day by 2014 [in the same ballpark as XOM and BP], and double by 2020—a much faster growth rate than that of other big producers. Analysts expect earnings to increase by 17% in 2011, to $4.52 per ADR, and 6% in 2012, to $4.81. [These forecasts are hardly trustworthy insofar as no one knows how many shares will be outstanding after the recapitalization.]

Although Petrobras' production is concentrated in Brazil, the company operates in 27 countries, primarily in Latin America and Africa. Exploration and production accounted for 24% of last year's $92 billion of revenue, but 55% of operating profit; "supply," primarily refining, contributed 47% of revenue and 37% of profit. Smaller units include oil and ethanol distribution, and domestic natural-gas distribution. Petrobras disclosed last month that it will spend $73.6 billion, or a third of its four-year budget, on investments in refining, which historically has yielded lower returns than production. The news stirred fears the move may be motivated by the government's desire to create jobs.

Petrobras' reserves are more than 80% crude oil, a higher concentration than any other major producer. With crude prices up 27% in the past year, to the mid-$70s a barrel, the company's shares should have headed higher. That they instead fell is a reflection of investor confusion over the government's asset-transfer plan. Some on Wall Street also are worried about the massive production and development costs the company will incur in coming years, outlays that could be even higher after BP's deepwater disaster in the Gulf of Mexico.

To CEO Jose Sergio Gabrielli, 60, a former economics professor, falls the challenge of balancing Petrobras' capital needs, the Brazilian government's social agenda and the complaints of private shareholders, who will be diluted by government's increased stake. [LMAO re the wording of the previous sentence.] A Petrobras spokeswoman declined to make Gabrielli available for an interview, citing the pending offering, which could raise up to $85 billion for the company.

The auditors' assessment is expected sometime in August, and the share sale is likely in September. Both will afford more clarity for investors. Petrobras consistently has delivered outsized production growth and profits. The stock's downdraft, in turn, has delivered a bargain for investors, who could find their shares sharply higher as the waters calm in coming years.‹

[DewDiligence]

Brazil, Petrobras Ink $42.5B Deal

[If you’re a minority shareholder and you think PBR is paying too much for the oil reserves in question, don’t say you weren’t warned (#msg-51214642).]

http://online.wsj.com/article/SB10001424052748703882304575466361168037990.html

›SEPTEMBER 1, 2010, 9:44 P.M. ET
By JOHN LYONS and JEFF FICK

BRASILIA—Brazil's state-controlled oil giant Petroleo Brasileiro SA has agreed to pay the federal government $42.5 billion in stock to acquire five billion barrels of deepwater reserves, a controversial price because investors say it is more than the oil is actually worth.

Shares of Petrobras, as the company is known, have crumbled this year on investor expectations the oil company would come under government pressure to pay above market price for oil reserves it is acquiring under a recapitalization plan. Petrobras also plans to sell new shares to the public to raise an additional $25 billion in cash under the plan.

The price works out to $8.51 per barrel, more than the $6 to $7 often cited by analysts as fair market value. Setting the price is a moving target because the oil is still deep below the ocean, and it is impossible to know with certainty how much it will cost to bring it to the surface.

Petrobras and federal government negotiators arrived at the price after several months of negotiations. [Calling these discussions “negotiations” is a little silly, IMO, insofar as the federal government of Brazil has a controlling stake in the company.]

Petrobras is acquiring reserves and cash to stock a war chest ahead of its development of massive, but difficult to reach, oil finds off the Brazilian coast. Expectations for soaring revenues from the underwater oil are so high that Brazilian President Luiz Inacio Lula da Silva routinely cites them as a key driver for Brazil's future development [and therein lies the problem].

Petrobras overpaying for the reserves may undermine the value of its tradable shares. It also signals the federal government's willingness to exert more control over Petrobras operations [duh]. Although Petrobras is controlled by the federal government, the company long has operated with a free market ethos for years, and a large number of its shares trade on U.S. and Brazilian market.

Major investors, including billionaire George Soros and asset management mammoth BlackRock Inc., have unloaded Petrobras shares this year.‹

[DewDiligence]

Politics, Not Deep Drilling, Pose Biggest Risk for Petrobras

[Nothing new here, but this write-up succinctly states the predicament for Petrobras investors.]

http://online.wsj.com/article/SB10001424052748703597204575483551475422226.html

›SEPTEMBER 13, 2010

The latest revision to the prospectus for Petroleo Brasileiro SA's $65 billion offering of common and preferred stock highlights the risks of the kind of deepwater-offshore drilling the new capital will fund. But the bigger risk may be political.

The mother lode of oil off Brazil's coast threatens to reintroduce politics into the management of the oil giant, which is controlled by the Brazilian government but has been ably managed on a commercial basis.

The prospectus stresses that 53% of the $224 billion the company has budgeted for capital expenditure through 2014 will go toward exploration and production, and this is focused on deepwater drilling. Petrobras is already the world's largest deepwater player, with 22% of global deepwater production in 2008, far ahead of No. 2 Exxon Mobil's 14% share. Petrobras will be drilling at depths beyond any current wells, so obtaining the oil will be difficult enough, and the risk of accidents and leaks could be significant.

Although the government holds about 30% of the company's capital and 55% of its voting shares, Petrobras has operated largely independently, especially since 2002, and Brazilian law had been loosened to allow partnerships with foreign oil firms. The prospect of an enormous revenue stream—with more than 14 billion barrels of oil equivalent, or BOE, of proven reserves and the potential for as much as 35 billion BOE—could bring the company back under tighter political control.

For one thing, as the prospectus points out, Brazil's congress is considering enacting rules for the exploration and production of oil and gas that might make Petrobras the exclusive operator in all unlicensed pre-salt areas—areas of rock under thick salt deposits—comprising about 10.7 million hectares. This envisions having Petrobras assume about a one-third interest in any public bids for such licenses, meaning it would retain a pre-eminent position in all drilling activities.

However, the company cautions that any new rules, and an agreement under which the company is allocated five billion barrels of deepwater reserves in exchange for issuing $42.5 billion worth of stock to the government, may be challenged by Brazilian courts—a wild card in evaluating the company. Some investors have complained that the company is paying too much for the fields.

In addition, the state of Rio de Janeiro's tax on exploration and production activities—enacted in 2003 but not enforced—could require Petrobras to pay the state about $6 billion per year.

Brazil's presidential elections in October will introduce another uncertainty [see #msg-51011758 and #msg-44866628 for more on this]. The candidate with a wide lead in the polls, Dilma Rousseff, is generally seen as having more leftist views than current President Luiz Inácio Lula da Silva, though she has his support.

Nor are the political risks limited to Brazil. While the majority of the company's investments are there, 44% of its international production and reserves are in Argentina, which levies export taxes on oil and gas sales that have been detrimental to operations. An additional 20% of international investments are in Bolivia, which in 2009 prohibited private ownership of the country's oil and gas reserves, complicating Petrobras's investment value there.

As Petrobras is used as an instrument of national policy, either by design or through economic evolution, it stands to become politicized. The danger is that it moves closer to Petróleos Mexicanos or Petróleos de Venezuela SA, the national oil companies of Mexico and Venezuela respectively, which have been tapped to promote a variety of social causes.

While shares of Petrobras have recently performed well in relation to major oil-company peers, the stock's movements will become increasingly volatile due to its being a relatively pure oil play, the potential risks of its new deepwater exploration and production emphasis, and the greater risk that the company's independent operating philosophy and financial behavior may be altered by politics.‹

[DewDiligence]

LOL—Brazil has renamed the Tupi field Lula in honor of the outgoing president:

http://www.upstreamonline.com/live/article240385.ece

[DewDiligence]

Lengthy and somewhat informative profile of PBR from Fortune:

http://features.blogs.fortune.cnn.com/2011/03/08/petrobras-the-next-oil-colossus

Nothing in this piece changes my view in #msg-51214642 that PBR is probably not going to be a good investment for minority shareholders.

[DewDiligence]

Mind-boggling—PBR says spending on the Santos basin during the next 5 years will total $73B, of which $54B will be spent by PBR and the rest by its equity partners.

Source: http://online.wsj.com/article/SB10001424052748704569404576299442174422356.html

[DewDiligence]

PBR cuts the domestic price of NG by 19%:

http://online.wsj.com/article/BT-CO-20111021-705572.html

This is good for the Brazilian populace, but not so good for PBR’s shareholders.

PBR is nominally a private company, and nominally is the most important word in this sentence.

[DewDiligence]

PBR’s earnings fell 26% YoY due to exchange rates (i.e. strong Real and weak Dollar):

http://online.wsj.com/article/SB10001424052970204358004577032460488965578.html

Political meddling in the Brazilian price of gasoline and diesel also contributed to the earnings downturn.

[DewDiligence]

PBR blurb from WSJ:

http://online.wsj.com/article/SB10001424052970203315804577211553456517484.html

Petrobras ranks fifth in production globally among listed oil and gas producers but trumps them hugely on spending. Yet the company's return on equity lies at the other extreme—by far the worst of the six biggest Western oil majors. That isn't likely to improve soon. Credit Suisse expects capital investments by Petrobras to achieve returns merely in line with its cost of capital, putting it on the cusp of destroying shareholder value.

I don’t disagree (#msg-51214642).

[DewDiligence]

Surprising factoid—Columbia’s Ecopetrol now has a bigger market cap than Brazil’s Petrobras:

http://online.wsj.com/article/BT-CO-20120516-714775.html

"There is very limited political interference [in Colombia]," Nathan Piper, an oil analyst at RBC Capital Markets, said… Colombia, for example, doesn't impose the same demands for locally produced goods and services in oil exploration and production as Brazil, which boosts costs and could slow down development, Piper noted.

According to the WSJ, Ecopetrol has the biggest market cap of any company based in Latin America.

[DewDiligence]

Why would PBR be having trouble selling its GoM assets (#msg-82188663)? Are they simply asking too much?

[DewDiligence]

PBR falls to 8-year low on dividend cut:

http://www.reuters.com/article/2013/02/05/petrobras-fuel-idUSL1N0B573T20130205

I think my viewpoint in #msg-51214642 has been borne out.

[DewDiligence]

Petrobras has some serious problems:

http://www.nytimes.com/2013/03/27/world/americas/petrobras-brazils-oil-giant-struggles-to-regain-lost-swagger.html

[DewDiligence]

Real headline that looked like a typo: “Petrobras Surges on Terrible Earnings”:

http://blogs.barrons.com/emergingmarketsdaily/2013/04/29/petrobras-surges-on-terrible-earnings-ytd-loss-nearly-erased

[DewDiligence]

PBR sells $11B(!) of fixed- and floating-rate debt with various maturities, the largest-ever bond deal by an emerging market company:

http://www.sec.gov/Archives/edgar/data/1119639/000129281413001146/pbra20130513_6k.htm

[DewDiligence]

More reasons to avoid PBR at any price; (see #msg-51214642 for background):

http://online.wsj.com/article/SB10001424127887324260204578587720789476286.html

Dominating the energy landscape in Latin America's largest economy and controlling the world's biggest offshore discovery in decades, Petróleo Brasileiro should be seeing a bright future. But surging local fuel demand, spurred in part by tight state control of domestic prices, is savaging the company's earnings.

What's more, Brazil's sudden crisis will increase the pain.

Petrobras must pay global prices in U.S. dollars for fuel imports but sell domestically in local currency at artificially low prices. In the last two years alone, after-tax losses in the company's domestic refining and marketing operations were $17.4 billion [!].

…Dollar-denominated investors in Petrobras suffered the worst returns of any large, integrated oil company in 2011 and 2012—and are on track to make it three years in a row.

[DewDiligence]

Political meddling in PBR is intractable insofar as the federal government of Brazil has control of the voting shares; the latest:

http://online.wsj.com/articles/petrobras-ceo-no-capital-increase-seen-before-2030-1404229898

Concerns about political meddling in the company's decision-making were renewed last week when Petrobras signed an unexpected deal with the Brazilian government. The agreement gives the company production rights for an additional 10 billion to 15 billion barrels of offshore oil reserves.

…The no-bid agreement grants Petrobras expanded production rights to four deep water oil fields off the coast of Brazil. Petrobras will have to pay a signing bonus of 2 billion reais ($910 million) to the government this year, plus an estimated 13 billion reais in oil over the next four years.

…Analysts acknowledged the potential long-term…but some also expressed concern about the timing of the announcement, coming four months ahead of presidential elections in which Ms. Rousseff will seek a second term [LOL].

Brazil’s pre-salt production now exceeds 500K bbl/day.

See #msg-100710615 for related info.